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Curian Capital No Longer Accepting New Accounts

After evaluating the Curian Capital, LLC (Curian) business and its position in the marketplace, the company has decided to stop accepting new accounts, effective July 31, 2015.

“When Curian launched 12 years ago, the competitive landscape and market trends favorably supported the business”

Curian will continue to actively manage existing accounts into 2016 to allow financial professionals and clients sufficient time to plan for the transition of accounts, said Mark Mandich, interim president and chief executive officer of Curian. The company expects to exit the business around the end of the first quarter 2016.

“When Curian launched 12 years ago, the competitive landscape and market trends favorably supported the business,” Mandich said. “Given the industry-wide changes in technology, product offerings and market size, Curian has determined that it is no longer commercially positioned to provide clients high value investment programs over the long term. This was a difficult decision. We appreciate the loyalty of our clients, business partners and staff and remain committed to assisting them throughout this transition.”

Curian Capital, LLC (www.Curian.com) is an asset management company that manufactures and distributes a comprehensive suite of investment strategies and asset management solutions to institutions, financial advisors and their customers.

Source: businesswire.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/curian-capital

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SunGard Is Said to Be in Sale Talks With Fidelity National Information

NYT article by Michael J. de la Merced

SunGard may have been planning to return to the public markets, but it may instead be sold to a peer.

The company, a financial software maker, is in talks to sell itself to Fidelity National Information Services, a big service provider for banks, people briefed on the matter said on Thursday. Such a deal could value SunGard at more than $8 billion, one of those people said.

If completed, a sale would represent a quicker exit for SunGard’s backers, an alliance of private equity firms that bought the company in 2005 for nearly $11 billion. That deal, struck in the early days of a leveraged buyout boom, has been one of the lengthier investments by private equity shops in recent years.

The company filed to go public last month as those investors — Bain Capital, the Blackstone Group, the buyout arm of Goldman Sachs, Kohlberg Kravis Roberts, Providence Equity Partners, Silver Lake and TPG Capital — sought to take advantage of strong stock markets to sell their holdings.

Those companies have rushed to hold initial public stock offerings of their portfolio companies, trading in the quickness and certainty that an outright sale of their properties would bring in exchange for a potentially higher payout.

But in virtually every I.P.O. filing by a company owned by private equity, the owners have explored a sale nonetheless.

SunGard, based in Wayne, Pa., provides a number of software products, primarily for banks and other financial institutions. The company’s revenue has been roughly flat for the last five years, while it has posted annual losses more often than profits during that time. Last year, the company lost $222 million on $2.8 billion in revenue.

Its suitor is also a big player in the financial services industry. Fidelity National Information Services, known within the industry as FIS, was spun off from Fidelity National Financial in 2006, and it focuses on banking and payments services.

The company has a market value of about $17.8 billion.

News of the talks was reported earlier by Bloomberg News.

Source: nytimes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/sungard-3

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Providing Wealth Management Services To Middle-Market Commercial Banking Clients

Forbes article by Russ Alan Prince

wealth chartBanks could significantly increase their profits by systematically providing wealth management services – investment advisory, insurance, retirement plans and other corporate benefits, estate planning, trust services – to their middle-market commercial banking clients.

The amount of additional revenues that are likely range from increases of 50% to as much as quadrupling it – a function of the products provided. The profit potentials are meaningful and dependent on the way the bank chooses to deliver wealth management services. Even the worst-case projections are exceedingly positive.

While this opportunity is far from a secret, very few banks have been even moderately successful in transitioning their middle-market commercial banking clients to their wealth management professionals. In general, the banks have failed to put in the systems and processes that are essential for leveraging their middle-market banking relationships. The following are three of the more critical components of a successful cross-selling program:

  • Profiling methodology: Only by understanding what wealth management services makes sense for the owners and senior managers of a middle-market company can the bankers effectively refer these individuals to the appropriate experts at the bank. The complication is that few bankers have the knowledge and insights to identify viable opportunities. Processes, such as the Whole Client Model, have proven extremely effective in both discerning the wealth management opportunities and developing highly effective customized approaches to converting these banking clients to wealth management clients. Either the bankers need to be educated on the process or a catalyst approach is required.
  • Compensating the bankers: The bankers need to also be incentivized to embrace the Whole Client Model or a similar process to generate business for the bank’s wealth management services. The compensation model should optimally address short-term and longer-term commitments to the endeavor. Moreover, it usually needs to be clearly connected to productivity.
  • Tracking and follow-up: A formal and robust business tracking system is essential. This needs to be complimented with an equally impressive follow-up methodology. Very importantly, the banker must always be in the loop if not directly involved in all key interactions between the wealth management specialists and the clients.

Commercial middle-market bankers have untapped goldmines of wealth management revenues sitting in their books of business. Although many banks have made considerable efforts to build their wealth management operations – with some of them being very successful – they usually fail to tap the easiest and one of the most rewarding sources of new business – their own middle-market commercial banking clients.

Source:  forbes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/providing-wealth

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Donald Trump Fails the Fiscal-Responsibility Test in His Fund Picks

MarketWatch article by Chuck Jaffe

Trump__2He doesn’t diversify, as most of his mutual fund holdings are from one company

Donald Trump is many things, but a thoughtful, properly diversified mutual fund investor isn’t one of them.

That became clear thanks to the 92-page Trump financial document that the Federal Election Commission released last week.

The document and the totals it purports to represent are nearly as controversial as the man. He claimed in the document filed July 15 that he had a net worth of more than $10 billion; as of June 30, when he formally declared that he was running for the Republican presidential nomination, he claimed a net worth of $8.74 billion.

There are hundreds of interesting numbers in the document, but I’ll leave most for others to decipher.

My interest was in the long list of marketable securities that make up his investment portfolio; there were 326 names, although a number of high-profile stocks like Apple, Microsoft and others appeared in multiple brokerage accounts. There’s no real telling how much money he has in marketable securities because the disclosure document puts investments in big ranges (think “$1,000,001-$5,000,000,” though he has a number of items that fall into higher and wider ranges), but that’s also not the real issue here.

No matter what you think of Trump’s politics, you probably wouldn’t want to follow his lead in mutual funds.

My interest was in The Donald as a fund investor, and once you get past the seven giant hedge-fund positions he holds favoring alternative investments (funds that an ordinary investor doesn’t have the cash to get into), he’s got 10 mutual funds that his constituency could go for if they wanted to invest like their favorite celebrity politician.

No matter what you think of Trump’s politics, however, you probably wouldn’t want to follow his lead in mutual funds.

Nearly all of Trump’s domestic open-end mutual funds are from the Baron Funds, a mid-sized fund family headed by the audacious Ron Baron. Trump has between $1 million and $5 million in Baron Asset, Baron Small Cap, Baron Focused, Baron Real Estate, Baron Growth and Baron Partners, with between $500,000 and $1 million in Baron Opportunity and Baron International Growth. There’s also between $100,000 and $250,000 in Baron Energy and Resources.

Baron Emerging Markets is listed twice as having between $250,000 and $500,000, once in the retail share class and once for the institutional class, which raises questions about whether Trump’s big investments are in the institutional class elsewhere, or if they are in the more pricey retail classes. (Baron’s institutional share class has a $1 million minimum investment, which makes it odd that the one fund disclosed as being for institutional investors actually shows an amount below that level.)

Trump is diversified internationally with at least half a million dollars in Invesco European Growth, at least $250,000 in Deutsche X-trackers MSCI Europe Hedged Equity, at least $100,000 in Parametric Emerging Markets and Deutsche X-trackers MSCI Japan Hedged Equity, and from $50,001 to $100,000 in iShares MSCI Japan. He also has between $100,001 and $250,000 in GAMCO Global Gold, Natural Resources & Income, a closed-end fund, and less than $15,000 in a Vanguard high-dividend fund.

While it may not be a surprise, as noted by Russel Kinnel, director of manager research at Morningstar, that “one brash New Yorker [Trump] would like another [Baron],” the Baron funds are not the shop that most experts would pick if you wanted most of your funds from the same place.

Source:   marketwatch.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/donald-trump-2

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Envestnet Recognized as a Leader in Transforming Wealth Management

envEnvestnet, Inc. (NYSE: ENV) continues to earn top wealth management industry awards.

Bill Crager, President of Envestnet, received the Money Management Institute’s (MMI) Advisor Solutions Pioneer of the Year Award. MMI’s Pioneer Award is given annually to an individual who embodies MMI’s mission to serve as an advocate and catalyst for the growth of the managed investment solutions and wealth management sectors. MMI also named Envestnet the Advisory Solutions Technology or Service Provider of the Year.

In addition, Lori Hardwick, Envestnet Group President of Advisor Services, was selected by Private Asset Management as one of the 50 Most Influential Women in Private Wealth. Envestnet won Family Wealth Report’s (FWR) Best Outsourcing Solution Award, and Envestnet | Tamarac was one of five finalists in both FWR’s Portfolio Management and Client Communications & Reporting categories. Furthermore, Envestnet | PMC Chief Investment Strategist Tim Clift was named one of the 10 Most Important People in ETFs by ETF.com’s “ETF Report.”

“Digital technology is changing the way advisors and their clients connect and transact, but we believe that, contrary to signaling the end of the financial advisor, it heralds the further empowerment of the financial advisor,” said Mr. Crager, who accepted the MMI awards at the Gateway to Leadership Industry Recognition Dinner in Charlotte, NC. “The entire Envestnet team is committed to providing advisors with the tools they need to harness this evolution, and provide the deep engagement their clients have come to expect. We are grateful to receive these accolades honoring our efforts to help advisors adapt to changes in their industry.”

Private Asset Management narrowed down its list of the 50 Most Influential Women in Private Wealth, which appeared in the May 2015 issue, using three main criteria—peer recommendations, the amount of responsibility held in current and previous roles, and significant impacts on private wealth management. Ms. Hardwick joined Envestnet shortly after its inception 16 years ago, and has played an influential role in helping to build the firm and its platform.

“I am humbled to be included among so many impressive role models for women in the private wealth space,” said Ms. Hardwick. “At Envestnet, our advisor-centric focus has been the driving force behind our growth through the years, and I am proud to be in a position to ensure advisors remain at the heart of what we do as we continue to grow.”

Envestnet received its FWR awards at the publication’s Second Annual Awards Dinner, held at New York’s Mandarin Oriental Hotel on March 15. The awards are designed to showcase technology providers in the global private banking, wealth management, and trusted advisor communities deemed to have demonstrated innovation and excellence during the previous year by a panel of distinguished judges.

“This recognition reflects the industry’s appreciation for the breadth of capabilities we provide advisors to create a unified wealth management process for serving clients and growing their businesses,” said Lincoln Ross, Executive Vice President, Advisory Services, Envestnet, who accepted the awards at the dinner. “We are glad to be acknowledged by prominent members of this industry as a significant force in wealth management.”

ETF.com’s “ETF Report” selected Mr. Clift as one of the 10 Most Important People in ETFs due in part to his role as a “gatekeeper” advising more than 100 exchange-traded fund (ETF) strategists on Envestnet’s open-architecture platform on how to better run their portfolios. Envestnet allows these ETF strategists to market their portfolios to advisors through unified managed accounts and other products.

“Advisors continue to choose ETF strategists as their preferred providers of access to the most promising strategies that the market has to offer,” said Mr. Clift. “Envestnet has pioneered research methodologies to help advisors identify the strategies that best fit their clients’ needs, and the recognition by ETF.com’s ‘ETF Report’ validates our innovation and thought leadership in this fast-growing area.”

About Envestnet   

Envestnet, Inc. (NYSE: ENV) is a leading provider of unified wealth management technology and services to investment advisors. Our open-architecture platforms unify and fortify the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet solutions enable the transformation of wealth management into a transparent, independent, objective, and fully-aligned standard of care, and empower advisors to deliver better outcomes. For more information on Envestnet, please visit www.envestnet.com

Source:  prnewswire.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/daily-service/envestnet-7

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Tycoon’s Daughters Must Wait Ten Years to Inherit His $20 Million Fortune

New York Post article by Ross Toback  and Julia Marsh

Victoria and Marlena Laboz

Victoria and Marlena Laboz

Daddy Dearest real estate millionaire Maurice Laboz, who died earlier this year, doled out early-bird bonuses to his girls in his will as long as they marry right, get good jobs and don’t even think about having kids out of wedlock.

The Laboz girls — Marlena, 21, and Victoria, 17 — are set to inherit $10 million apiece when they turn 35. But they can get their hands on some of the dough beforehand if they follow Daddy’s rules for the straight and narrow. For example:

Marlena will get $500,000 for tying the knot, but only if her husband signs a sworn statement promising to keep his hands off the cash.

She nets another $750,000 if she graduates “from an accredited university” and writes “100 words or less describing what she intends to do with the funds” — with the trustees appointed by her dad to oversee her money responsible for approving her essay.

Both daughters get a big incentive to earn decent salaries by 2020. Each young woman is guaranteed to receive an annual payout of three times the income listed on their personal federal tax return. In a not-so-subtle nod to the taxman, their checks will be cut every April 15.

If the daughters have kids and don’t work outside the house, the trustees will give them each 3 percent of the value of their trust every Jan. 1. There’s one catch: The money flows only for a “child born in wedlock.”

The sisters could earn the same amount being “a caregiver” to their mother, Ewa Laboz, 58, whom their father was in the middle of divorcing. She got nothing in the will and has indicated that she will contest it.

“It’s a way to control things from the grave,’’ said estate lawyer Jeffrey Barr, who is not involved in the case. “You don’t see a lot of it, but it happens. People do it because . . . they think it’s for the good of the children.’’

Estate lawyer Oshrie Zak said the move is not surprising in this case.

“Accustomed to the control over others that their money affords them in life, the will is their last shot at controlling their loved ones,’’ he said of Laboz and other successful people.

Maurice Laboz signed the will in April 2014, about nine months before he died at age 77. He left behind a $37 million fortune.

He justified leaving his wife out of his will by citing a “prenuptial agreement, which limits her rights,” according to the document.

Ewa Laboz filed court papers last month contesting that, arguing she deserves a share of the pot because she was still married to her husband when he died.

The rest of Laboz’s fortune is set to go to charities, including The Michael J. Fox Foundation for Parkinson’s Research and Meals on Wheels.

Source:  nypost.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink: http://thetrustadvisor.com/news/tycoons-daughters

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Apple Considered BMW’s i3 As Model To Make Its Own Electric Car

bidnessetc.com article by Martin Blanc

apple-inc-aaAccording to Manager Magazin’s report, published on Friday, last year, Apple Inc. (NASDAQ:AAPL) approached German automaker BMW to provide expertise to make an Apple electric car.

The publication revealed that the CEO Tim Cook visited BMW’s i3 vehicle production facility in Leipzig to get an insight on the electric car-manufacturing. It was also outlined that Apple intends to use i3’s design as basis for its self-driven electric vehicle.

Rumours about Apple’s electric car plans gained traction in February this year, when the company was said to be developing an automobile under a project dubbed Titan. In this regard, it was said that the company shifted its core operations labor to the car-making division. Hundreds of employees were reported to have been tasked with making an electric vehicle, which looked similar to a minivan.

The latest gossip has renewed speculation that Apple is serious to roll out its own electric car. In the last three months, rumours lost momentum, owing to the overwhelming success of the company’s iPhone, and its ecosystem’s strength overshadowing other projects.

In a recent research note, Berenberg Bank analyst Adnaan Ahmad stated that Apple would soon lose momentum as its flagship iPhone suffers negative growth in the upcoming quarters. He believes that the company’s overreliance on iPhone is a great disadvantage, and that the law of large numbers would soon hit Apple. Mr. Ahmed suggested that Apple should consider making its own electric vehicle, and said that it should acquire the famed US electric automaker, Tesla Motors Inc. (NASDAQ:TSLA).

For vehicles, Apple does provide its CarPlay service; this allows drivers to enjoy the company’s services from the car’s dashboard. However, Apple has remained quiet about its plans to enter the electric car market.

Electric car-manufacturing is expensive, and it cannot be said with surety that Apple would replicate iPhones’ success in its electric cars. It remains to be seen whether the latest scuttlebutt turns out to be true, and the company is ready to disrupt the electric automotive market with an Apple car.

Source:   bidnessetc.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/apple-considered-bmws

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Notes from Jon Stein on How to be a Better Advisor

Jon-Stein-220x300

Belay Advisor story by Steve Sanduski, MBA, CFP

Jon Stein, Co-Founder and CEO of Betterment, tells how he co-founded the company and built it into one of the fastest growing and most innovative investment firms in the country. It’s a great story about how a smart guy with a timely idea can marshal the resources and build a company that is reshaping how business is done in the investment world.

  • Advisors, you need to really focus on adding value above and beyond the investment management piece. As Jon said, “I think the investment management piece has been heading toward a commoditization for a long time.”
  • Think the Robo Advisors are just a bull market phenomenon? Think again. Jon said, “I think that there’s a misperception that we are somehow more sensitive to the downside. I think that we’re actually positioned to grow even faster during a market decline as people get upset about other investments they have and start looking for something consistent, something reliable, something that takes advantage of the best investment strategies regardless of market conditions.”
  • Taking a cue from Carl Richards, Jon said, “We seek to get to behavior gap zero. Our goal as an advisor is to get people the actual returns they deserve,” (as opposed to less than market returns due to behavioral faults).
  • Are you asking your clients about their preference for the tradeoff between trading and taxes? You should after considering this gem from Jon. “Customers who see that they have a taxable gain before they make a withdrawal or an allocation change transaction are 60% less likely to make that transaction than people who didn’t see that data.” In other words, as Jon noted in the interview, more than half of investors wouldn’t make a trade if they knew the tax implication of making the trade.
  • Jon has huge goals for the firm and said, “I do think we’ll be a multi-trillion dollar asset management company.” Listen to the interview for Jon’s take on where that money will come from.
  • Betterment has interesting demographics. Jon said the average age of their customers is 36 yet 25% of their assets are coming from customers who are 50 plus. So advisors, if you want to prosper over the next 10 years, you have to implement a strategy to partner with firms like Betterment, create your own online service, or else face a tortured death.
  • Jon shared what tools Betterment is developing to make pre-retirees and retirees more comfortable with working with them, and here’s a hint—it’s something most financial advisors do as part of their value-added service. Translation—Betterment is rapidly adding services that investors normally turn to financial advisors for.
  • Betterment has a “negative churn.” Listen to Jon explain what that means.
  • In terms of staff who interact with customers on a day-to-day basis, Jon says Betterment typically runs at a ratio of about 1 client-facing staff per 10,000 customers. A traditional financial advisor firm has about 1 advisor per 150 clients. Think about the implications of that!
  • Jon shares the one thing that keeps him up at night and it should keep you up at night too.
  • You don’t become a fast growing company without having good management strategies and Jon shared some of the apps, strategies, and philosophies he uses to manage the firm.

Source:   belayadvisor.com

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Posted by:  Staff, The Trust Advisor

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How Citigroup Courts Wealthy Young Heirs: Teach Them to Buy Art

Bloomberg article by Margaret Collins

BUY-ART_One evening last month at Citigroup Inc. in downtown Manhattan, a group of 20-somethings spent $95,000 in a bidding war for a black-and white photo tapestry of the fashion model’s face. They were confident that the work by the prominent New York artist Chuck Close was worth the price.

That’s why there was a collective gasp when Tash Perrin, a senior vice president at Christie’s, revealed that the work didn’t sell when it was last auctioned in 2013.

The sale and money that the 40 participants used to bid with was fake, but the lesson on valuing and buying art was real. The attendees, from wealthy families in 18 countries, are poised to inherit enough money in coming years to purchase some of the items they were shown at the event — from Cartier earrings worn by Elizabeth Taylor to a Bjork album cover photograph. For firms like Citi Private Bank, teaching them how to invest in art is one tool to help retain the heirs when the family wealth is passed on to them.

“You don’t have the birthright to the next generation’s wealth,” said Money Kanagasabapathy at Citi Private Bank, who directs such events for clients’ children. “We want to continue to have the relationship with the family.”

Next Generation

In the past, wealth managers haven’t been so successful at keeping younger clients. On average, firms have seen almost half of the assets leave when a family’s wealth is being handed to the next generation, according to the latest figures from a report on global private banking by consulting firm PricewaterhouseCoopers.

Banks are trying to reverse that trend because an estimated $36 trillion is expected to transfer to heirs in U.S. households alone from 2007 to 2061, according to a 2014 study by the Center on Wealth and Philanthropy at Boston College. The figure swells when including billionaires worldwide, a majority of whom are over age 60 and have more than one child.

aaaaThe U.S. economic recovery also has accelerated parents’ desire to prime children for what’s coming, said Arne Boudewyn, a managing director in Wells Fargo & Co.’s Abbot Downing unit.

“Company valuations are higher than in past years, including family-owned and controlled companies,” said Boudewyn, whose clients generally have at least $50 million. “Many families who never seriously contemplated selling are now fielding offers they can’t refuse.”

Training Camps

Citi Private Bank’s event included a session on buying art because the asset class is increasingly seen as an investment, with global art sales hitting a record in 2014 as new collectors drove up prices for trophy works.

Yet art is an illiquid investment and difficult to value, as the team betting on Kate Moss found out. The millennials spent $95,000 of their fake $100,000 allotment on the piece in the mock auction.

Other banks including Credit Suisse Group AG, Deutsche Bank AG, UBS Group AG and Coutts, a unit of the Royal Bank of Scotland Group Plc, run training camps for clients’ children. Held in countries including Singapore and Switzerland, the programs usually span several days to more than a week and participants often fly in from around the world. The seminars — which cover topics such as sustainable investing, philanthropy, entrepreneurship or how to protect your family reputation and brand online — are free to attend while clients generally cover their own travel and accomodation.

Reviewing Art

During the Citi Private Bank event, experts from Christie’s helped participants review a mock catalog of about a dozen works. They advised each team on criteria to determine value: a work’s quality, rarity, condition and history of ownership.

Attendees then bid on pieces that have been, or will be, auctioned including an Andy Warhol polaroid print of Giorgio Armani and a pair of ear clips by Seaman Schepps formerly owned by the Duchess of Windsor. Perrin then showed the teams what the works really sold for so they could see if they spent their money wisely.

Wells Fargo’s Abbot Downing and U.S. Trust, a unit of Bank of America Corp., have a financial education curriculum with individual coaching instead of boot camps. Some parents or grandparents require heirs to take it before telling them how wealthy they are and what they will inherit, said Chris Heilmann, U.S. Trust’s chief fiduciary executive. In June, the bank added a program for teenagers as young as age 13.

The young adults who attended Citigroup’s event have jobs and even some master’s degrees, but their parents want them to hone skills that are unique to their wealth — such as bidding on a Picasso or taking over a family business, said Kanagasabapathy.

“There is no tolerance today for an incapable CEO,” he said.

Wealth managers like Citigroup said they hope the trainings will strengthen both family profits and bank loyalty.

“It’s easier to retain a client than to get a new one,” he said.

Source:   bloomberg.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink: http://thetrustadvisor.com/news/art-2 ‎

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Janet Yellen is Ready to Raise Rates

MarketWatch article by Carolin Baum

yellinFederal Reserve policy makers are hoping, even praying, that no unexpected domestic development or international crisis intervenes to prevent them from taking the first baby step to normalize interest rates at the Sept.16-17 meeting.

Why? Fed officials point to a number of reasons: the unnatural state of a near-zero benchmark rate; the potential risk of financial instability; an improving labor market; diminishing headwinds; and yes, expectations of 3% growth just over the horizon.

Fed Chairman Janet Yellen, usually considered a member of the Fed’s dovish faction, sounded determined to act when she testified to Congress last week.

“We are close to where we want to be, and we now think that the economy cannot only tolerate but needs higher interest rates,” Yellen said during the Q&A. “Needs,” as in the patient needs his medicine.

What’s the urgency with an economy chugging along at 2-something percent and low inflation? I suspect Fed officials are terrified of being caught with their pants down, in a manner of speaking. Should some unforeseen event come along to upend the economy, the Fed’s arsenal would be dry. They’d like to put some space between their policy rate and zero.

Sure, the Fed has a balance sheet that can be expanded almost without limit. But policy makers are the first to tell you they have little experience with the extraordinary measures taken in response to the financial crisis.They’re much more comfortable with an interest-rate tool, preferably set at a level that enables them to engineer a negative inflation-adjusted rate should the circumstances warrant.

Even with several rounds of quantitative easing, no one at the Fed talks about the quantity of money. (Former Fed chief Ben Bernanke even called QE a “misnomer.”) Nor do Fed officials think about monetary policy the old-fashioned way: the idea that if the central bank puts out more money than the public wants to hold, people will spend it.

The goal of QE was to ease financial conditions. As explained by Bernanke in a November 2010 Washington Post op-ed, the Fed buys long-term Treasuries, which lowers risk-free rates and drives investors into riskier assets: stocks, corporate bonds and mortgage-backed securities. The rise in stock prices boosts consumer wealth, raises confidence and encourages spending, while the decline in corporate bond and mortgage rates stimulates investment and makes housing more affordable.

Mission accomplished? Last week, Yellen mentioned the situations in Greece (”difficult”) and China (weaker growth, skittish stock market) but neither sounded like much of an impediment to the Fed’s intended lift-off later this year. She implied that the preconditions for raising rates — further improvement in the labor market and a reasonable degree of confidence that inflation will move back to its 2% objective — had been satisfied.

The labor market continues to send mixed signals: the unemployment rate is at a seven-year low of 5.3% while the labor-force participation rate is near a four-decade low of 62.6%.

And what will instill confidence that inflation is headed back to the 2% target? Signs that actual inflation is heading back to the target. The personal consumption expenditures price index, the Fed’s preferred inflation measure, increased 0.2% in May from a year earlier. With food and energy excluded, the year-over-year increase is 1.2%. Both measures have shown a pick up in the latest three months. And Fed officials expect inflation to rise gradually to 2% once the “transitory effects” of earlier declines in energy and import prices dissipate.

Oops. Crude oil prices, which seemed to have stabilized following a 60% decline between June 2014 and March 2015, are sliding again on the prospect of Iranian oil entering world markets. On Monday, U.S. benchmark crude CLU5, +0.30%  settled below $50 for the first time since April.

And oil is just part of the story. If the Fed is looking for a reason to hold off on a September rate increase, it can look no further than commodities markets. The CRB BLS spot raw industrial price index, which includes economy-sensitive materials such as scrap metals (copper, steel and lead), rubber and zinc, has taken a dive to levels last seen in late 2009. The decline in raw materials prices will feed into the prices of finished goods. So the Fed’s confidence in inflation heading higher may be dashed once again.

The Fed scrapped its intended June lift-off because of concerns about the decline in first-quarter U.S. growth. Broad-based weakness in commodity prices is generally symptomatic of weak global demand. If the Fed is at all uncertain about its decision to start normalizing rates, it already has the excuse it needs.

Source:  marketwatch.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/janet-yellen-2 ‎

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